...theme Revenue Recognition R evenue is usually the largest single item in financial statements, and the issues involving revenue recognition are among the most important and difficult ones that standardsetters and accountants face. In recent years, concerns related to the recognition of revenue in accordance with Accounting Standards have heightened significantly. Quite often, companies end up tweaking the Revenue numbers, besides some other reasons. Recording revenue improperly is also a commonly used ‘earnings management technique’. The ever evolving business models and the growing online economy have only compounded the issue. Earnings Management/Issues with revenue recognition have been the subject of headlines in the United States and in the other parts of the world in the last few years. -Shrikant Sortur The author is a member of the Institute as well as AICPA, working with Lason Systems Inc, MI, USA. He can be reached at shrikant_ sortur@yahoo.com Revenue Recognition Under US GAAP It is estimated that Revenue Recognition related aspects appear in close to two hundred different pieces of accounting literature; of course these pieces of literature include many nuances, some of which are unique to particular transactions. Since no comprehensive standard on revenue recognition exists, there is a significant gap between the broad conceptual guidance in the Financial International Accounting Standards (IAS) are drafted on a ‘Principles-based’ approach....
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...CHAPTER 18 REVENUE RECOGNITION MULTIPLE CHOICE—Conceptual AnswerNo.Description c1.Revenue recognition principle. b2.Definition of "realized." a3.Definition of "earned." d4.Recognizing revenue at point of sale. d5.Recording sales when right of return exists. c6.Revenue recognition when right of return exists. d7.Revenue recognition when right of return exists. b8.Appropriate accounting method for long-term contracts. c9.Percentage-of-completion method. b10.Percentage-of-completion method. c11.Classification of progress billings and construction in process. b12.Calculation of gross profit using percentage-of-completion. a13.Disclosure of earned but unbilled revenues. c14.Revenue, cost, and gross profit under completed contract. b15.Disadvantage of using percentage-of-completion. a16.Loss recognition on a long-term contract. c17.Accounting for long-term contract losses. d18.Criteria for revenue recognition of completion of production. a19.Completion-of-production basis. c20.Presentation of deferred gross profit. c21.Appropriate use of the installment-sales method. b22.Valuing repossessed assets. b23.Gross profit deferred under the installment-sales method. b24.Income recognition under the cost-recovery method. b25.Income recognition under the cost-recovery method. d26.Cost recovery basis of revenue recognition. d*27.Allocation of initial franchise fee. a*28Recognition...
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...General Instructions There are ten cases included in this packet (Cases #1 through #9). You are responsible for reading all nine cases prior to class on Monday, October 7th. In addition, your group is responsible for informally presenting the solution to one case on that date. The case assigned to each group corresponds to your group number. Your presentation should take the form of “teaching” the rest of the class the material related to the case. Keep in mind that for exam purposes all groups are responsible for the content and solutions to all cases so your group’s effectiveness at teaching the material is invaluable to your classmates. How you can best accomplish your task is up to you but you should, at a minimum, include the following in your presentation: • An overall summary of the case facts; • An explanation of the key accounting issue(s); • An identification and discussion of the relevant sections of the FASB Accounting Standards Codification; • A demonstration as to how the relevant authoritative accounting literature was interpreted and used to address the facts in your case; • A discussion of the accounting conclusions reached; and • Any required journal entries In addition to the in-class informal presentations, your group is also responsible for preparing a memo which includes a summary of: • The case facts so that the reader knows the background and the substance of the accounting issues in your case; • The relevant...
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...financial statements to stockholders, and the Internal Revenue Service requires all businesses to file annual tax returns. Many business transactions affect more than one of these arbitrary time periods. For example, a new building purchased by Bank of America or a new airplane purchased by Southwest Airlines will be used for many years. It does not make sense to expense the full cost of the building or the airplane at the time of purchase because each will be used for many subsequent periods. Instead, we determine the impact of each transaction on specific accounting periods. When determining the amount of revenues and expenses to report in a given accounting period can be challenging. Proper reporting requires an understanding of the nature of the company’s business. Two principles are used as guidelines; they are the revenue recognition principle and the matching principle. The revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned. For example, in a service company, revenue is considered to be earned at the time the service is performed. When recognizing expenses, a simple rule is followed; “Let the expenses follow the revenues.” Which means expense recognition is tied to revenue recognition. The practice of expense recognition is referred to as the matching principle because it dictates that efforts (expenses) be matched with accomplishments (revenues). Recognizing expenses too early overstates current period...
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...1. Is Eye Vision’s arrangement with Holland Hospital within the scope of ASC 985-605, Software: Revenue Recognition? In this case, the main content of the Eye Vision’s arrangement with Holland Hospital include embedded software medical equipment and an initial option to purchase a two-year separately priced maintenance agreement. In this case, because “Eye Vision has never sold, nor does it offer to sell, the Clear View Laser without the embedded software because the software is necessary to perform the medical procedures for which the laser is intended”, and “Eye Vision has never sold, nor does it offer to sell, the Clear View Laser without the embedded software because the software is necessary to perform the medical procedures for which the laser is intended”. So the software components and non software components of tangible product could be consider function together to deliver the tangible product’s essential functionality, so according the FASB codification 985-605-15-4 and 985-605-15-4A, the equipment and the software are excluded from the Software: Revenue Recognition., Accordingly, the initial option to purchase a two-year separately priced maintenance agreement on the Clear View would be non-software deliverables excluded from the scope of Software: Revenue Recognition. References from FASB codification ASC 985-605-15-4 The guidance in this Subtopic does not apply to the following transactions and activities: e. Software components of tangible products...
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...Revenue Recognition: Converge between U.S. GAAP and IFRS While the basic revenue recognition model under US GAAP and IFRS share some similarities, if we make a comparison under two systems, we may find quite a few differences. In general, IFRS has much less industry-specific guidance than does US GAAP. First, one of the main differences lies in timing of revenue recognition with respect to contracts criteria such as long-term construction or contingency. According to US GAAP, revenue must be realized or realizable with certainty. The revenue recognition criteria may lead to deferrals in recognition. On the contrary, IFRS just defines the revenue recognition as “when it is possible that future economic benefits will flow into the enterprise and can be measured reliably”. Second, as for the long-term contracts revenue recognition, if reliable estimate cannot be made, GAAP allows completed contract method. It differs from that of the IFRS, which allows the cost recovery method. Third, US GAAP provides a much more detailed guidance about separation and allocation of multiple-deliverable arrangements in comparison to the guidance of IFRS. The US GAAP does not allow revenue recognition if a company fails to deliver remaining elements. Under IFRS, an entity can recognize its revenue if delivery is probable. The new ASU entitled “Revenue from Contracts with Customers” definitely leads to some important changes from current GAAP. There are core revenue recognition principle and five...
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...METROPOLITAN CASE STUDY Part I: Codifications and quotations used in following scenarios 1) Service revenue should be recognized on a straight-line basis, unless evidence suggests that the revenue is earned or obligations are fulfilled in a different pattern, over the contractual term of the arrangement or the expected period during which those specified services will be performed, whichever is longer. (SAB Topic 13A3, Interpretive Response to ques.6) 2) Revenue should be deferred until the specifications have been achieved or the customer accepts the service. (SAB Topic 13A3b, Interpretive Response to ques.1) 3) Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable...states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash... (ASC 605-10-25-1-a) 4) Being earned… states that revenue is not recognized until earned…an entity’s revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. (ASC 605-10-25-1-b) 5) All waste becomes the property of, and owned by, Metropolitan when they service the customer and take physical ownership of the waste. Metropolitan...
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...each. 1. Membership revenue should be recognized when the membership fee is collected. Here Baber should use the earnings based approach. For memberships using a prepaid approach, they have not earned the revenue paid at the beginning of each term although they have collected the funds. Recognizing revenue at this point is against financial reporting best practices as there is uncertainty about whether or not the buyer will demand a refund at any given time. It falsely inflates revenue at present and forces the company to declare losses later when refunds are demanded. NHRC should only recognize revenue as it occurs. As a year is a long period to wait to declare revenue, NHRC could declare revenue at the end of what it deems to be a critical event, for example at the end of each month they can recognize 1/12 of the membership fee. For members using the financing option, membership can be recognized as revenue when collected, assuming the payment coincides with the timeframe they are paying for. For example if a member is making monthly payments, and the payments are equal for the year, then their dues can be declared as revenue as they are received because they are paying for the current month. If this is not the case, then NHRC needs to be careful to track dues and align them to membership services provided to maintain accuracy. Baber should not implement this change. 2. Revenue from the coupon books should be recognized when the books are sold. Revenue from coupon books can...
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...To: Bruce Darling From: Jordyn Peterson Date: October 28, 2014 Subject: Revenue Recognition The SEC provides criteria to help assess risks for the timing of revenue recognition. Recognizing revenue can be difficult to decide so auditors refer to the provided guidance to apply the concept that revenue should not be recognized until it is realized or is realizable and earned. The criteria to help decide when revenue should be recognized includes: * Pervasive evidence of an arrangement exists * Delivery has occurred or services have been rendered * The seller’s price is fixed or determinable * The collectability is reasonably assured These criteria are just a simple guideline because depending on the client the recognition could be different. The auditor must further research a client’s transactions regarding aspects such as contracts, shipment of goods, passing of title, sales transactions and returns so they are able to make an informed judgment to determine when and how to recognize revenue. Separate Deliverables The key feature when determining revenue recognition in AOL’s software package is deciding if the sale of software and the monthly Internet services are separate deliverables. If they are not separate deliverables they should be combined and treated as a single unit of accounting. The auditor should gather information regarding if they sell the Internet service and the software separately and if the arrangement has a right to return the service...
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...AFM recognized premium revenue at the time it received the policyholder’s up-front cash payment. The company’s accountants argued that since the level of up-front payments received from policyholders had been stable over the last few years, this method was an appropriate reflection of economic reality. For example, Fuji Computers entered into a five-year insurance contract with Tokyo AFM against earthquake damage to its headquarters building. As is customary, it paid the 100 million premiums for the five-year coverage up front in cash. Question: How would you recognize revenues associated with this type of catastrophe insurance contract? This case can be considered as premiums from short-duration insurance contracts, which are intended to cover expected claim costs resulting from insured events that occur during a fixed period of short duration. As of now the management is recognizing premium at the time it received policyholder’s up-front cash payment, but they should recognize the premium as earned revenue over time as the risk covered by the policy runs off. This is called a “deferral-matching approach”, as it attempts to defer recognition of any revenue or expense so that it can be matched with the timing of the incurred losses. Therefore, premiums from short-duration contracts are earned and recognized as earned revenue evenly as insurance protection is provided. In this case of Fuji computers the 100 million premiums being recognized as revenue evenly over the contract...
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...managers can analyze the health, risks, and profits. Two principles come into play when discussing financial statements and what information is applicable during certain periods. Those principles are revenue recognition principle and expense recognition principle. After discovering which transactions are applicable the information is input in the financial statements. Then the applicable information is written in a journal with explanations. Sometimes changes occur and when this happens one needs to understand the situations requiring adjustment journal entries. The revenue recognition principle requires the company to only recognize earned revenue in the accounting period. This principle falls under generally accepted accounting principles or GAAP. The principle applies to companies depending on the type of accounting base they use. Under accrual-basis accounting, for example a delivery service company completes deliveries for a shipment company the entire month of July for a fee of $500. The company should recognize the revenue upon completion of the month, even if the delivery service company does not expect payment for another couple of weeks. Under the same principle and accounting basis, if advance payment occurs to the delivery service company, they cannot record the payment as revenue but as a liability until the work is complete. Under cash-basis accounting, using the same example as above, the...
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...potential users of the financial statements prepared by WAL and they are: -Leo Titan – CEO, WAL - owners of, NSL - owners of, -Minority shareholders invested in WAL And NSL, Fabio and Fox accountants - they are audit partners, External users of the financial statements (such as potential investors), the government (many accounting issues that could violate standards). Analysis: First of all after the review of documents and as a result of various conversations there are a few issues that need to be addressed. The first issue is lenders to the arena are concerned that the arena could not generate special-use revenue and in turn risk their investment. This becomes an audit issue because the investors are providing a way to finance the arena but if the arena in turn cannot support the payment with its revenue streams it causes a possible situation where revenues are overstated to make the arena look good. This directly relates to the second issue as the mortgage lenders and minority shareholders want to see financial...
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...CHAPTER 18 Revenue Recognition ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis *1. Realization and recognition; sales transactions; high rates of return. 1, 2, 3, 4, 5, 6, 22 1 1, 2, 3 1 1, 2, 3, 4, 5, 7, 8, 9 *2. Long-term contracts. 7, 8, 9, 10, 11, 12, 22 2, 3, 4, 5, 6 4, 5, 6, 7, 8, 9, 10 1, 2, 3, 4, 5, 6, 7, 14, 15, 16, 17 1, 2, 3, 6 *3. Installment sales. 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 7, 8, 9 11, 12, 13, 14, 15, 16 1, 8, 9, 10, 11, 12, 15 1, 2, 3 *4. Repossessions on installment sales. 8 13, 17, 18 10, 11, 12, 13, 14 *5. Cost-recovery method; deposit method. 13, 22, 23, 24 10 15, 16 8, 9 *6. Franchising. 22, 25, 26, 27, 28 11 19, 20 10 *7. Consignments. 29 12 21 *This material is dealt with in an Appendix to the chapter. ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1. Apply the revenue recognition principle. 1 1, 2, 3 2. Describe accounting issues for revenue recognition at point of sale. 1 1, 2, 3 1 3. Apply the percentage-of-completion method for long-term contracts. 2, 3 4, 5, 6, 7, 8, 9 1, 2, 3, 4, 5, 6, 7, 16, 17 4. Apply the completed-contract method for long-term contracts. 4, 5 4, 8, 9, 10 1, 2, 3, 5, 6, 7, 15, 16, 17 5. Identify the proper accounting for losses on long-term contracts. 6 10 5...
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...Final Exam Review- Hitzig parts 1-3 1. Revenue Recognition: General: 25-1 The recognition of revenue and gains of an entity during a period involves consideration of the following two factors, with sometimes one and sometimes the other being the more important consideration: ← a. Being realized or realizable. Revenue and gains generally are not recognized until realized or realizable. Paragraph 83(a) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue and gains are realized when products (goods or services), merchandise, or other assets are exchanged for cash or claims to cash. That paragraph states that revenue and gains are realizable when related assets received or held are readily convertible to known amounts of cash or claims to cash. ← b. Being earned. Paragraph 83(b) of FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises , states that revenue is not recognized until earned. That paragraph states that an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues. That paragraph states that gains commonly result from transactions and other events...
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...© 2000 American Accounting Association Accounting Horizons Vol. 14 No. 2 June 2000 pp. 235-250 Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators Patricia M. Dechow and Douglas J. Skinner Patricia M. Dechow is an Associate Professor and Douglas J. Skinner is a Professor, both at the University of Michigan. SYNOPSIS: We address the fact that accounting academics often have very different perceptions of earnings management than do practitioners and reguiators. Practitioners and reguiators often see earnings management as pervasive and probiematic—and in need of immediate remediai action. Academics are more sanguine, unwiiiing to beiieve that earnings management is activeiy practiced by most firms or that the earnings management that does exist should necessarily concern investors. We explore the reasons for these different perceptions, and argue that each of these groups may benefit from some rethinking of their views about earnings management. INTRODUCTION Despite significant attention on earnings management from regulators' and the financial press,^ academic research has shown limited evidence of earnings management. While practitioners and regulators seem to believe that earnings management is For example, SEC Chairman Levitt delivered a major speech on earnings management in the fall of 1998 in which he advocated a niunber of initiatives to improve the quahty of financial reporting (Levitt 1998). As part...
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